US Files WTO Case Against Chinese Industrial Subsidies

7 February 2007

US Trade Representative Susan Schwab announced on 2 February that Washington has initiated WTO dispute settlement proceedings against China, alleging that a range of subsidy programmes illegally support the export of manufactured goods as well as discriminate against imports.

The US requested formal WTO consultations with China after bilateral talks on the issue failed. Beijing has made no comment other than to say that it was a 'pity' that the issue could not be resolved bilaterally. Consultations are the first step in WTO dispute procedures. If the two sides cannot resolve their differences within 60 days, the US would be free to seek the creation of a panel to adjudicate the matter.

Both domestic manufacturing groups and the Democratic-led Congress have been putting pressure on the Bush administration to take sterner action on trade with China. They blame unfair Chinese competition for industrial job losses and the US' yawning trade deficit.

Washington alleges that the nine Chinese government programmes in question use a series of tax refunds, reductions, and exemptions to subsidise exports by foreign investors in China and their Chinese business partners, and encourage the consumption of domestic equipment and other manufacturing inputs over imported equivalents.

According to the US trade representative's office, these programmes are available for all products made in China, but are particularly used for steel, computers, clothing, and other manufactured products. The partly foreign-owned companies that are eligible for these subsidies account for some 60 percent of Chinese manufactured exports. Chinese exporters who meet certain requirements are exempted from sales tax, it added.

The US claims that these programmes violate a number of prohibitions against export subsidies and import substitution subsidies laid out in the WTO Agreement on Subsidies and Countervailing Measures (SCM). The WTO definition of a subsidy includes fiscal incentives such as tax credits.

"The United States believes that China uses its basic tax laws and other tools to encourage exports and to discriminate against imports of a variety of American manufactured goods," said US Trade Representative Schwab. "China's subsidies can particularly distort trade conditions for small- and medium-sized American enterprises and their workers," she added. Article 5 of the SCM Agreement prohibits the use of subsidies which cause "injury to the domestic industry of another Member."

A representative of the National Association of Manufacturers told a 31 January Senate hearing that "some of our members see prices of Chinese products so low - sometimes even lower than the cost of the raw materials - that it is difficult for them to see how they can compete." Other manufacturing groups have made similar complaints.

The US' trade deficit with China in 2006 was over USD 230 billion. Many US politicians argue that this is fueled in part by Chinese subsidies and a yuan-to-dollar exchange rate that Beijing keeps artificially low. China's exchange rate is not part of the new WTO challenge.

Several senators applauded the Bush administration for taking action against China for policies that were hurting US workers and manufacturers. Max Baucus, a Montana Democrat who chairs the Senate committee with jurisdiction over trade, remarked, "I hope that today's action is a signal that the US trade representative will take more vigorous action in the future when China, or any other country, fails to abide by trade agreements." The committee's top Republican, Iowa Senator Charles E. Grassley also praised the move. "American businesses and consumers stand to lose if we overreact. But when the case is clear, we need to take strong action. That's what we're doing today," he said, according to a report in the Washington Times.

Trade sources report that other major economies, including Japan and the EU, declined requests from the Bush administration to join the case.

If the US wins in a dispute settlement hearing, it would be allowed to impose retaliatory tariffs on Chinese products in an attempt to induce compliance. A Chinese victory would allow it to maintain its policies.

China has moved quickly to resolve past US complaints at the WTO. One, regarding a value-added tax on semiconductors, was resolved during the consultation phase. Another, over anti-dumping duties on US kraft linerboard (used in the construction on cardboard boxes), was settled even before a formal complaint was filed.

The only US complaint against Beijing to reach the stage where a dispute panel was established, a joint challenge with the EU and Canada of China's tariff treatment of auto parts, is still in progress (see BRIDGES Weekly, 20 September 2006).

In related news, US Undersecretary of Commerce for International Trade Frank Levin said that Washington was also considering bringing a WTO case against China over the piracy of American goods.

ICTSD reporting; "United States files WTO case against China over prohibited subsidies," UNITED STATES TRADE REPRESENTATIVE NEWS, 2 Feburary 2007; "US takes WTO action against China," MWC NEWS, 3 February 2007; "China calls WTO case of subsidies 'a pity'," REUTERS, 4 February 2007; "US starts legal action against China at WTO over subsidies," BLOOMBERG NEWS, 2 February 2007; "US taking China to WTO over subsidies," THE WASHINGTON TIMES, 3 February 2007; US steel, electronics may benefit from WTO case, " ASSOCIATED PRESS, 4 February 2007.  

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